Key Performance Indicators are an absolute necessity to monitor the health of your business and track progress towards business goals. Virtually all organizations today have some form of KPIs along with processes for managing, tracking, and reporting their status on a regular basis.
Managed well, they are the best friend of business leaders. Having quick and easy access to frequently refreshed KPI data provides an "early warning" for issues that are impacting the business - thus enabling corrective action before the problem gets out of hand.
Example: a corporate sales forecast dashboard that highlights potential problems in meeting revenue targets and enable sales leaders to take necessary action before quarter-end.
Managed poorly, KPIs can do more damage than good... steering you in the wrong direction or providing misleading / misunderstood information - any of which could result in faulty decision making that can hinder (at best) or destroy your business.
Example: # New customers. If this metric is counting new customers only (raw) - but not factoring in churned customers (net) - a very misleading picture of your business will be painted.
How to tell if your KPIs are causing health problems for your business
Your annual KPI check-up should start with a self-assessment. Ask yourself the following questions:
1) Are the corporate and departmental KPIs well defined?
The challenge here is ensuring the KPIs are WELL defined. This can be rather subjective, but here are a few characteristics of well-defined KPIs:
The definitions - and purpose - are understood by other business functions.
They are measurable in ways that are understood by all business functions.
The status thresholds (i.e. when does a KPI turn "yellow" or "red") are clear, appropriate, and documented in the definition.
There exists an owner and process for follow-up analysis and action.
2) Are the corporate and departmental KPIs clearly communicated and understood across the entire company/department?
KPI awareness across the organization fosters the development of team and individual goals and/or OKRs that are aligned with department and corporate goals and metrics. Likewise, all department heads should aware of each others KPIs to foster an environment of active cross-functional support. Make sure there is an open and broadly communicated location where the KPIs and definitions can be found by anyone in the company.
While reports / dashboards showing the CURRENT STATUS of KPIs are often restricted to leadership or others who "need to know" - typically due to the data being considered "insider information" - proactively sharing the results after quarter-end or year-end after earnings calls (if applicable) along with a narrative will keep the entire company engaged and focused on the critical business goals.
3) Are the department and corporate KPIs truly measuring the complete top-to-bottom health of the organization?
This is another area that can be subjective, but taking a closer look at your existing KPIs is never a bad idea.
Here are a few things to look out for that may be undermining the full value of your KPIs:
Not covering all the key business functions. Sales, finance, and customer sat are all areas that commonly end up with corporate-level KPIs. But what about marketing and the top-of-the-funnel? Or customer support? These and other business functions can in fact be leading indicators for potential issues with future pipeline or product quality.
KPIs that are "fun facts". For various reasons - personal preference, historical (a metrics that has always been measured), etc. - there may be metrics that simply do not belong in the league of KPIs. If a KPI exists that does elicit immediate action from leadership when the metric is trending in the wrong direction, it should no longer be a KPI as it will introduce needless "noise" into the discussion of overall business health.
KPIs that cannot be directly tied to your corporate goals or key business priorities. For example, a KPI on corporate internal training effectiveness might make sense for companies that require or depend on effective health or safety training. It might not make as much sense for other companies. Again, if the KPI is not something that will elicit major concern at the leadership level when it is trending in the wrong direction, it should re-evaluated.
4) Are your KPIs at the proper level of granularity?
Keep in mind that KPIs exist with the express purpose of being able to quickly identify potential issues related to the health of the business. Anything that causes unnecessary distractions or obfuscates issues is a serious problem.
KPIs that are too granular can lead to micro-managing at the executive level, while KPIs that are too general may lead to being unable to quickly identify underlying problems.
For your KPI check-up, make sure your KPIs are in the sweet spot of granularity by looking closely for these red-flags:
KPIs that are too granular. A good rule-of-thumb: a KPI metric should be owned by mid-level management (e.g. director). Chances are KPI data that is owned by an individual contributor or first-level manager is likely to be too granular for a KPI. Of course, this may not apply for smaller organization or those with very flat management hierarchies.
KPIs that are too generic. One temptation is to create a KPI that is an index - or an aggregate of multiple metrics that is meant to show a high-level status of a process or output that has multiple components. Such KPIs should be avoided as they can result in the "hiding" of underlying problems. It is best to identify the one or two key metrics from the index and surface those separately.
5) Are there a good mix of lagging and leading indicators?
Many KPIs will by their nature be "backwards looking" or "lagging indicators" - reflecting things as they were at some point in the past. For example, an annual NPS survey and score could be 12 months out of date. In a world where customer satisfaction can significantly change in a matter of weeks, it would not be advisable to have an annual NPS KPI as the only customer satisfaction metric being tracked.
"Forward looking" or "leading indicators" will be able to provide advanced warning for issues. Churn rate (percentage of customers that do not renew) is an example of a leading indicator for revenue as well as possible product/service quality issues or competitive challenges.
It should also be noted that some metrics may be both leading and lagging indicators - depending on what sort of analysis is done with the data. For example, customer support ticket volume could be a lagging indicator for product quality, but a leading indicator for customer satisfaction. Both are valuable - so be sure you are analyzing the data for the desired purpose.
At the end of the day, you will need both leading and lagging indicators. If you have too many lagging indictors, look for ways to turn them into leading indicators.
6) Can the KPI data be audited and recalled in the future?
An often overlooked component in the management of KPIs is the ability to audit the data - as well as being able to view the data as it was in the past.
Some KPIs may have legal compliance or regulatory requirements associated with the data, but even those that don't should be treated in the same way as it may be important to audit the data even for internal purposes.
One recommended best practice is to capture snapshots of the underlying data
at key points in time (at least at the end of each quarter). We have witnessed situations where after quarterly KPIs were reported out, ongoing issues with the data collection and storage were discovered. An audit of the data discovered the KPIs were impacted - and the quarterly KPIs needed to be re-stated.
Capturing snapshots can also be valuable in situations where the KPI calculations are changed - thus providing the ability to go back in time and recalculate the KPI.
7) Are your KPIs encouraging the right employee behavior?
This is an insidious problem where KPIs can sometimes inadvertently result in undesired employee behavior. For example, a customer support KPI on tickets closed per day per rep. This can be useful for ensuring operational effectiveness and productivity, but can also result in customer support reps closing tickets too soon - resulting in downstream customer satisfaction issues.
On the other hand, continuing the customer support tickets example, a better KPI might be related to transactional customer satisfaction surveys associated with support tickets.
For each of your KPIs consider the potential negative employee behaviors that could result from the focus on their activities and the corresponding pressure / repercussions.
8) Is there a formal process and cadence for discussing the status of the KPIs and drilling down into any problem areas?
Who is reviewing the KPIs? And how often?
If the KPIs are not being reviewed by the people with the ability/authority to interpret and drill-down into the data, or if the cadence of the review is too long, then the opportunity to catch the early warning signs and make corrective actions will be severely impacted.
Make sure that there is a formal process and cadence for review of the KPIs by the owner, as well as the complete set of KPIs at the executive level.
The importance of the last part cannot be overstated. The cross-functional KPI review is sometimes ignored, or done too infrequently. Understandably so, as it can be uncomfortable to leaders to expose "bad news" to their peers. However, properly run KPI status reviews that focus on the overall health of the business - where egos are left at the door - are critical in successfully identifying issues and gathering the right resources across the organization to address and correct them. Very rarely will the KPI owner have all the resources to fully investigate and analyze the information, have visibility into the underlying processes, and understand the upstream factors and downstream ramifications.
9) Do "drill-down" dashboards or reports exist that enable self-service and on-the-spot analysis with quick refresh time into problem areas identified by the KPI?
Pay special attention to ALL of the elements of this question:
Self-service: The initial "triage" should be able to be performed by the leader who owns the metric to efficiently round up the appropriate resources to investigate further.
On-the-spot: the necessary drill-down dashboards or reports should be readily available such that they can be called up in a meeting with no warning or preparation.
Quick refresh: If there are troubling indications in the KPI, having the latest data available - without having to wait for a weekly data refresh - is critical.
If a KPI is truly important and critical in monitoring the health of the business, then an investment in developing and maintaining the necessary supporting reports and dashboards should be a priority.
10) Does the KPI review process include discussions on the "Green" status KPIs as well as the the "Yellow" or "Red" KPIs?
It is just as important to know and understand what is going well as it is to know and understand what is not going well.
Of course, the priority should be on problem areas to ensure the health of the business is not deteriorating. However, if time does not permit a readout on the healthy parts of the business, then offline readouts should be conducted to document and share the story and reasons for the successes.
11) Is there a formal process for a KPI Check-Up? (to ensure they are the right ones, and to identify any necessary definition, calculation, or status adjustments)?
An annual (perhaps more frequently in rapid growth companies) KPI Check-Up is strongly recommended to answer the questions highlighted above - in particular:
The current set of KPIs are still the right ones for measuring the health of the business, or if any should be dropped, or new ones added
There sufficient leading indicators among the KPIs
The definitions, calculations, and status indicators reflect the current business
Summary of What Healthy KPIs Look Like
Conducting your KPI Check-Up
Participants: The check-up should include (as appropriate) the entire corporate or functional leadership team as well as key subject matter experts. Additionally, someone from the analytics team who can provide input on what data is available and what calculations are feasible.
Some considerations when conducting your KPI Check-Up:
How Many KPIs are REALLY needed: In one extreme situation, we have seen a dashboard with ~35 KPIs that was reviewed at the quarterly board of directors meeting. The effort to manage this package provided several people with busy work but did not deliver sufficient ROI as very few of the KPIs were actually ever reviewed. So keep the number of KPIs to a manageable number that reflect the most important factors in the health of the business.
There should be a perpetually static set of KPIs: We believe in a system by which there are a very small core set of KPIs that are in fact static in definition and calculation. This is critical to measuring performance of the company over time. Such metrics as ARR, Churn, NPS often fall into this category.
However, a larger set of KPIs are needed to reflect the changing dynamics of the business and competitive landscape. These metrics might - and in some cases SHOULD - change over time.
Leverage the "KPI Tier Framework"
Consider a KPI Framework that implements the concept of Tier1, Tier2, and Tier3 KPIs:
Tier 1: Small set of the most important corporate-level KPIs that are static and perpetual
Tier 2: Larger set of KPIs that are very important, but may be of interest to specific business functions. It is unlikely these will go away, but it is possible that over time they become Tier 1.
Tier 3: A set of KPIs that come-and-go based on business needs. Perhaps there is a major product launch coming up in two quarters. It would be entirely appropriate to add a KPI to the list that may fall off in a few quarters.
We like to use a sports analogy for this KPI Tier framework: The English Football (soccer) league system. There is the Premier League and lower tiers (The Championship, League One, etc.) where teams can get promoted or relegated. ManU, Chelsea, Arsenal, and Liverpool would be Tier1 as they will likely never get relegated. Some teams, say Norwich City, sometimes get promoted to the Premier League and sometimes get relegated. To a lesser extent, American professional baseball (MLB, AAA, AA, A leagues) would be another analogy.
Anticipate and be prepared to deal with the politics:
Here are a few examples where the thorny topic of politics may come in to play with KPIs. Generally, political issues are not completely preventable, but being aware of their potential can prepare you for dealing with the situations when they do arise.
Are the KPIs controlled by a team (or teams) with a vested interest in the numbers? Is there a potential for skewing the numbers to show favorable results?
Are there business functions without a corporate-level KPI and are feeling left out?
Is there sensitivity to KPIs that are always Yellow or Red and there is a temptation to change the definition, calculation, or status level?
Consider separating ownership of the KPI from its measurement and reporting. The analytics version of the "fox guarding the henhouse" - where separating the measurement from the ownership prevents the first political issue as discussed previously.
Generally speaking, this should be considered a best practice, but for smaller organizations, this may not be feasible. However, leveraging the auditing capabilities discussed earlier can help manage any potential risks.
Consider adopting a Balanced Scorecard framework.
This is a framework that fosters the alignment of business strategy, KPIs, and strategic initiatives.
In some organizations this takes the form of a formal process and set of best practices. However, more commonly, some of the concepts are adopted into the management and administration of KPI and metrics.
One Balanced Scorecard concept that we favor and recommend is that of the cascading scorecard / dashboard - where KPIs can be drilled down from the corporate level down to the underlying business units and down to individual departments or teams.
We actually like to take this one step further where for the most critical KPIs there is a dashboard that provides drill-downs into the key drivers.
Healthy KPIs - Healthy Business
You are now ready to make sure your organizations KPIs are themselves in good shape and providing the insights to keep your business healthy.
# KPI #KPIhealthcheck
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